Why Micron's Stock Bulls May Be Wrong

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Micron Technology Inc. (MU) bulls may be all wrong when it comes to the future direction of the stock. Micron has surged by over 33% in 2018, versus a broader S&P 500 which is up only 2%. The analyst community is just as bullish as investors, with nearly 87% of analysts covering the stock having a buy or outperform rating, according to data from Ycharts. But, in a striking disconnect, those same analysts see earnings declining by nearly 27% to $7.56 per share in 2020, down from estimates of $10.36 in 2018. (For more, see also: Micron Stock: Is the Rally at Risk?)

Revenue growth is hard to find in Micron estimates too, with revenue expected to decline by 2% in 2020 to $27.99 billion, from estimates of $28.59 billion in 2018. KeyBanc raised its price target on Micron to $65 from $53, according to reports at TheFly. Even more, the firm increased its estimates for 2018 by 4% to $10.66, and by 3% for 2019 to $10.12, both above the consensus, but again no earning growth on a year-over-year basis. 

Something Seems Off

There is no doubt that something seems off when comparing the bullish sentiment the stock reflects versus the terrible revenue and earnings outlook. It seems odd that the bullish sentiment of investors is not reflected in the estimates going forward. In fact, the forecast would suggest that analysts are looking for the big margins Micron is currently experiencing not to last much longer. 

Margin Contraction

Micron shares have seen significant margin expansion since 2016. This is part of the reason for the stock's strong advancement, but estimates would suggest that margins could come under considerable pressure in the future should revenue remain flat, and that could explain why those earnings estimates are falling. Additionally, it is worth wondering why revenue is expected to remain flat in the coming years. The underlying trends for Micron's products appear bullish, with the rise of the mobile phone, the datacenter and the future of autonomous driving. (For more, see also: Is Now the Time to Buy Micron Technology?)

Cheap Valuation

Micron's stock has historically traded at a cheap earnings multiple, and part of that is due to the cyclical nature of the business. But the share's rise and multiple expansion could also be a function of those betting that the cyclical nature of the business is a thing of the past, becoming more steady and predictable. The stock currently trades are 6.3 times one year forward estimates. 

There is no doubting the bullish sentiment in the stock and the potential for growth in the business for the future. The question is why is that optimism not reflected in the earnings and revenue estimates going forward. One wonders if the bulls have it all wrong. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance. 

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